Turning off the autopilot: Fortune’s 2020 investor’s guide

It has been one of the most reliable rules of thumb during the economic expansion: Own the whole stock market, and you’ll reap rewards. But a slowdown could force investors to be more selective.
November 21, 2019, 9:30 AM UTC
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Photograph by Tom Schierlitz
Photograph by Tom Schierlitz

Over the past decade, investors have reaped immense gains thanks to the longest-ever bull market in U.S. stocks. Most of us have also profited from something else: a slow-motion seismic shift that has slashed the cost of playing the market.

The earthquake in question is the rise of “passive” investing, exemplified by index mutual funds and ­exchange-traded funds that track benchmark indexes. Ten years ago, stock investors held three times as much money in actively managed funds—funds whose holdings are typically selected by MBA-wielding analysts and number crunchers—as they did in passive funds. This August, passive funds wrested away the crown, surpassing active ones in assets under management for the first time. 

This financial revolution has been spurred by budgetary common sense. Passive funds cost far less to operate, and their creators pass those savings on to customers in the form of much lower fees. A raft of studies has shown that those savings often outweigh any performance edge conferred by the active managers’ expertise. And technological changes that sharply lowered the cost of trading have only widened that cost advantage.

To see how one Wall Street giant is struggling to adapt to such changes, read Jen Wieczner’s profile of Goldman Sachs CEO David Solomon:

Knocking Down Walls at Goldman Sachs: Can CEO David Solomon Get the Storied Bank to Grow Again?

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Photograph by Celeste Sloman for Fortune

One year into his tenure, the bank’s new leader is bulldozing the old ways of doing business.

Above all, the fact that U.S. indexes have been on such a tear has made passive investing feel like a no-brainer. When a rising tide is lifting all boats, why pay extra to let someone else steer your sloop? 

The new decade, however, could challenge our faith in the power of passivity. Even the more bullish strategists interviewed in the 2020 Investor’s Guide expect lower stock returns in the years ahead. As Savita Subramanian of Bank of America Merrill Lynch told our Investor Roundtable: “The companies that are going to outperform the market aren’t big enough to offset the companies that are going to underperform.” Index investors, in other words, may soon learn that they aren’t immune from pain.

A Roundtable of Investing Experts Share Their Best Advice for 2020

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Our panel, from left: Rob Sharps • T. Rowe Price; Karina Funk • Brown Advisory; Angela Strange • Andreessen Horowitz; Josh Brown • Ritholtz Wealth Management; Savita Subramanian • Bank of America Merrill Lynch.
Photographed by Mackenzie Stroh for Fortune; Grooming

Fortune‘s panelists see great opportunities for 2020. But they also see a changing of the guard among the stock market’s winners.

What’s the antidote to disappointing returns? It isn’t abandoning passive funds: The long-term advantages of investing cheaply are too good to surrender. But the time may be right for playing stock picker again. Historically, investors who consistently beat the market have done so by devoting at least a small part of their portfolios to concentrated bets on timely trends—and when markets are sluggish, that outperformance looks even more meaningful.

In that spirit, Shawn Tully profiles one highly strategic thinker, Weijian Shan, who has earned stunning returns from targeted investments in Chinese consumers.

China’s Private Equity Champion on Winning With the Chinese Consumer

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Weijian Shan near PAG’s headquarters in Hong Kong
Photograph by Verónica Sanchis Bencomo

Weijian Shan has earned huge returns thanks to shrewd bets on what Chinese consumers need and want. Here’s what he’s betting on now.

And in our annual stocks and funds guide, Rey Mashayekhi and Anne Sraders get very choosy, delving deep into five narrower sectors that should thrive even—or perhaps especially—if the broader market disappoints.

The 27 Best Stocks to Buy for 2020

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Photograph by Tom Schierlitz

There are plenty of reasons to be cautious about the stock market in 2020, but companies like these are likely to pay off.

A version of this article appears in the December 2019 issue of Fortune with the headline “2020 Investor’s Guide.”

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